Silicon Valley Health Startups Promise Enormous Payouts

It may not sound as flashy as social media, but healthcare is becoming a new star in Silicon Valley. Driven by the promise of enormous payouts, entrepreneurs are using the latest technology and design to help save lives, and make money.

“It’s risky,” said Nate Gross, co-founder of San Francisco, California-based Rock Health, an incubator for healthcare startups. “You have a few more cards stacked up against you.” For example, Gross said, investors’ hesitancy is one of the setbacks. “It’s easier to understand a general tech product you can use than an app for cancer patients that you can’t use,” he said, adding that making healthcare look “sexy” is crucial for startups looking for funding.

Borna Safabakhsh is one entrepreneur who managed to do just that. His company, Agile Diagnosis, has reportedly raised more than $2 million in seed investment. The Palo Alto, California-based startup develops software that helps doctors to provide more accurate diagnosis. Safabakhsh, a recent graduate of Rock Health and another accelerator called Y-Combinator, said it’s extremely important to show the investors that you’re very familiar with your users.

“Understanding the context of a doctor is the hardest part,” Safabakhsh said, who has no academic background in medicine. “Whether it’s primary care setting, ER setting or urgent care setting, things are all different,” he said. For better feedback and interactions, Safabakhsh and his partners decided to work with medical students first, who, he said “have the greatest need and are willing to grow with” the company.

“To be able to provide informational value to an expert, we have to be much more sophisticated and mature than we are right now,” Safabakhsh said.

Even if your product is designed for consumers, not doctors, it could still be baffling to figure out the demand. M. Jackson Wilkinson is the co-founder of Kinsights, an online community that connects parents to answer each other’s health questions about their children. Although married to a pediatric doctor, Wilkinson doesn’t have kids.

“It helps living with a doctor,” Wilkinson said. “But there’s definitely a learning curve.” With previous experience in a consulting firm, Wilkinson said he knows how to “beef up” knowledge on different industries. But in healthcare, “the stakes are much higher.”

Except for the special needs of their users, healthcare entrepreneurs may have to study FDA regulations as well, something mass-audience developers don’t have to worry about.

For Geoff Clapp, the co-founder of Health Hero Network, a remote health monitoring business acquired by Bosch Healthcare five years ago, he had to study up on FDA regulations when developing his business. Once a product involves collecting health data for clinical analysis, the FDA requires “medical device” approval, which includes a process called 510(k) clearance and a privacy protection framework called HIPPA.

However, said Clapp, the regulators are still catching up with the latest technology that would, say, turn a smart phone into a blood pressure monitor, or a laptop into an X-ray scan reader. “It’s extremely cloudy right now,” Clapp said. “There’s really no case law yet.”

Despite the challenges of launching a product in a highly-regulated, and quickly evolving industry, Clapp believes more regulations are not necessarily anti-innovation. Instead, he said, clearly written rules may be helpful to improve product quality and keep the industry healthy. “You have a responsibility as a healthcare entrepreneur, “Clapp said. “When the iTunes store is full of snake oil … our market dies.”

In addition to learning hurdles and regulatory issues, competing with the big players in a lucrative market is also inevitable. “A lot of the powers are satisfied and satiated in their current revenue models,” Nate Gross of Rock Health said. “But the startups are here to disrupt that a lot of the times.”

But it’s tough to grab a share from the big companies, which are dominant in certain fields in healthcare, such as Electronical Medical Records, or EMR, where doctors store and manage patients’ digital health data.

“I see a whole bunch of people try to create stand-alone, personal health records, and they universally don’t do well,” said Dan Imler, a pediatric physician at Boston Medical Center who has been involved with several healthcare startups. “The more the technology is integrated into the workflow that a doctor is used to, the more likely it’s going to be accepted,” Imler said, adding that the big companies that create those EMR systems usually monopolize the market, leaving very little space for startups to squeeze in.

“It may sound cliché, but people want to create positive changes and build things that matter,” Borna Safabakhsh said, explaining why entrepreneurs entered this industry despite all the challenges.

And the payback, if succeeded, could be abundant too. According to the Center For Venture Research at University of New Hampshire, 30 and 19 percent of angel investment went to healthcare in 2010 and 2011 respectively, making it one of the top markets. In addition, a report released by the Centers for Medicare and MedicAid Services suggests that the national healthcare spending was nearly 18 percent of the country’s GDP in 2011 and is expected to grow by 4.2 percent this year.

“Social media is not one fifth of our economy,” Gross said. “The opportunity to make a difference in healthcare is tremendous.”